April 11, 2022
Treasury yields continued their ceaseless march higher last week and the yield curve, which had been inverted from 2s to 10s, un-inverted as the long end sold off dramatically. The 10-year yield increased by 32 basis points to 2.71%, a huge move in only a week and is now at a new cycle high. The 5-year yield increased by 20 basis points while 2- and 3-year yields increased by 6 and 9 basis points, respectively. Helping spark the selloff in bonds, on Tuesday Fed Governor Lael Brainard, historically one of the more dovish members of the FOMC, made surprisingly hawkish comments about the Fed’s plans to tighten monetary policy and unwind the swollen Fed balance sheet “at a rapid pace.” Agency bullets and callables both tightened last week (details below).
The economic calendar picks up a bit this week with the March CPI release tomorrow (Tuesday) and retail sales and consumer confidence coming on Thursday ahead of the market close on Friday. Market participants will be looking for signs that inflation is close to peaking, which will be difficult to decipher given the still partially broken supply chains. Until inflation begins to subside, consumer confidence will likely remain weak. Another handful of Fed members are scheduled to speak throughout the week as the FOMC continues to prepare markets for a swift tightening of policy.
Agency bullets had widened for much of the past month, but that reversed last week amidst the sharp selloff. Bullets out to the 5-year portion of the curve are now trading at the tightest levels since February, spreads of only a paltry 1 to 2 basis points. For this reason, the trade desk continued to see a lot of activity in Treasurys, particularly off-the-run notes in the 2- and 3-year area. Callables tightened in last week, with many 2- to 5-year structures tightening by 2 to 5 basis points, while 10- to 15-year terms tightened by 10 to 14 basis points. As can be seen in the graphs below, the selloff in Treasurys so far this year has put bond yields above pre-pandemic levels. In fact, over the past decade, bond yields in the intermediate portion of the curve have only been modestly higher and, even then, for less than a year.
The following table reflects last week’s total issuance across the primary GSE issuers. Total issuance fell to $2.4 billion while call volume remained at zero. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week Fannie Mae passed on its Benchmark slot. There are no major issuances scheduled for this holiday-shortened week. The Federal Home Loan Bank has its next Global issuance date next Tuesday, April 19th.
Senior Vice President, Investment Strategies